Update on the Tax Cuts and Jobs Act (TCJA)

The Tax Cuts and Jobs Act (TCJA) was passed by Congress in a hurry late last year, and the IRS and tax preparers have been working to digest some of the more thorny issues created by the tax overhaul. Here are the latest answers to some of the most common questions:

Is home equity interest still deductible?

The short answer is: Not unless you’ve used the money to buy, build or substantially improve your home.

Before the TCJA, homeowners were able to take out a home equity loan and spend it on things other than their residence, such as to pay off credit card debt or to finance large consumer purchases. Under the old tax code, they could deduct interest on up to $100,000 of such home equity debt.

The TCJA effectively writes the concept of home equity indebtedness out of the tax code. Now you can only deduct interest on “acquisition indebtedness,” meaning a loan secured by a qualified residence that is used to buy, build or substantially improve it. If you have taken out a home equity loan before 2018 and used it for any other purpose, interest on it is no longer deductible.

I’m a small business owner. How do I use the new 20 percent qualified business expense deduction?

Short answer: It’s complicated and you should get help.

Certain small businesses structured as sole proprietors, S corporations and partnerships can deduct up to 20 percent of their qualified business income. But that percentage can be reduced after your taxable income reaches $157,500 (or $315,000 as a married couple filing jointly).

The amount of the reduction depends partly on the amount of wages paid and property acquired by your business during the year. Another complicating factor is that certain service industries including health, law, consulting, athletics, financial services and accounting are treated slightly differently.

The IRS is expected to issue more clarification on how these rules are applied, such as when your business is a mix of one of those service industries and some other kind of business.

What are the new rules about dependents and caregiving?

There are a few things that have changed regarding dependents and caregiving:

Deductions. Standard deductions are nearly doubled to $12,000 for single filers and $24,000 for married joint filers. The code still says dependents can claim a standard deduction limited to the greater of $1,050 or $350 plus unearned income.

Kiddie Tax. Unearned income of children under age 19 (or 24 for full-time students) above a threshold of $2,100 is now taxed at a special rate for estates and trusts, rather than the parents’ top tax rate.

Family credit. If you have dependents who aren’t children under age 17 (and thus eligible for the Child Tax Credit), you can now claim $500 for each qualified dependent member of your household for whom you provide more than half of their financial support.

Medical expenses. You can now deduct medical expenses higher than 7.5 percent of your adjusted gross income. You can claim this for medical expenses you pay for a relative even if they aren’t a dependent (i.e., they live outside your household) as long as you provide more than half of their financial support.

Stay tuned. We will continue to give you guidance from the IRS on the new tax laws.

If you would like to engage us to determine how any aspects of the new tax law apply to your specific situation, please give our office a call to set up a planning or projection service appointment to explore the planning steps you might consider.

The Mangold Group has been hosting my QuickBooks file, managing my sales tax, income tax estimates, preparation of my business and individual income tax returns for several years now. It’s such a GREAT relief to have someone else taking care of those tasks for me.